Friday, December 28, 2007

Growth policies: No substitute for thinking

Most well-trained economists would agree that the standard policy reforms included in the Washington Consensus have the potential to be growth-promoting. What the experience of the last 15 years has shown, however, is that the impact of these reforms is heavily dependent on circumstances...We argue in this paper that this calls for an approach to reform that is much more contingent on the economic environment, but one that also avoids an anything goes attitude of nihilism. We show it is possible to develop a unified framework for analyzing and formulating growth strategies that is both operational and based on solid economic reasoning.

The authors then offer a growth diagnostics framework that is summarized by Rodrik here. The paper concludes with the following:

Across-the-board reform packages have often failed to get countries growing again. The method for growth diagnostics we provide in this paper should help target reform on the most binding constraints that impede growth... As our discussion of El Salvador, Brazil, and the Dominican Republic illustrates, each of these circumstances throws out different diagnostic signals. An approach to development that determines the action agenda on the basis of these signals is likely to be considerably more effective than a laundry-list approach with a long list of institutional and governance reforms that may or may not be well targeted on the most binding constraints to growth.

I agree with Rodrik's general message on the context-dependency of growth policies. His offered framework is also useful for policymakers. Yet it is no substitute for thinking by developing countries' economists and policymakers: They need to analyze which of the agenda are particularly relevant to their respective economies. Rodrik puts it best: "The framework does not economize on inputs (the thoughtfulness required to reach decisions), only on outputs (the list of things that we recommend governments should do to get growth going)".

PS: For a somewhat similar exercise for Indonesia (though it doesn't seem to be using this exact framework), see the reports posted here (particularly its Special Focus on Regions reports, on the left sidebar).

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About Me

I am a student in economics. This is not to say that I'm only interested in money supply, interest rates, or exchange rates. We care about all of the things that non-economists care about - we just see them in a unique way. I am also an Indonesian - which also doesn't mean I only care about Indonesian affairs. I was just born that way.